SEC Drops Crypto Rule Appeal: Victory for DeFi Advocates

The US Securities and Exchange Commission (SEC) has withdrawn its appeal against a court ruling that blocked a controversial broker-dealer rule. The rule, if implemented, would have given the SEC jurisdiction over decentralized crypto protocols. In a brief filed on February 19 with the Fifth Circuit Appeals Court, the SEC moved to "voluntarily dismiss this appeal," which went unopposed.

The SEC's appeal was in response to a November ruling from a Texas federal court judge in a lawsuit brought by crypto trade groups the Blockchain Association and the Crypto Freedom Alliance of Texas. The ruling blocked the SEC's proposed change to the definition of a dealer, which would have required all crypto liquidity providers and automated market makers with more than $50 million in capital to register with the agency.

Crypto advocacy groups argued that the change would have placed unenforceable requirements on decentralized finance (DeFi) protocols, many of which have no centralized authority and would have difficulty enforcing Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. Texas District Court Judge Reed O'Connor agreed, stating that the "SEC exceeded its statutory authority by enacting such a broad definition of dealer."

The SEC's voluntary dismissal now ends the legal battle, which the two crypto industry advocacy groups jointly filed in April. Kristin Smith, CEO of the Blockchain Association, celebrated the victory on Twitter, stating, "Complete and total victory today in our case against the SEC over the dealer rule. The crypto industry can breathe a sigh of relief."

The SEC's decision to withdraw its appeal comes as the agency undergoes changes under the new US administration. President Donald Trump has appointed acting chair Mark Uyeda and nominated Paul Atkins to lead the SEC. Uyeda has established a Crypto Task Force headed by Commissioner Hester Peirce, dedicated to creating a framework for digital assets. The agency has also delayed or paused litigation against crypto firms launched under the previous leadership, seemingly to reconsider the actions after advice from the Crypto Task Force.